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Award Ceremony Speech

The basic economic problems are the same in all societies,
regardless of whether these are characterized by capitalism,
socialism or other types of political organization. As the supply
of productive resources is limited, everywhere, all societies are
confronted by a series of questions concerning the optimal use of
available resources and the fair distribution of income among
citizens. Such normative questions can be treated in a scientific
manner that is independent of the political organization of the
society under consideration, a fact which is nicely illustrated
by the two prize winners of this year, professors Leonid
Kantorovich and Tjalling Koopmans. Although one of them has been
living and working in the Soviet Union and the other in the
United States, these two scholars show a striking similarity in
their choice of problems and methods. For both of them efficiency
of production has been the central preoccupation of their
analysis and independently of each other they have developed
similar models of production.

At the end of the 1930's Kantorovich was
faced by a concrete planning problem - how to combine the
available productive resources in factory in such a way that
production was maximized. He solved this problem by inventing a
new type of analysis, later called linear programming. This is a
technique for finding the maximum value of a linear function
under constraints consisting of linear inequalities. A
characteristic feature of this technique is that the calculations
give as by-products some expressions, called shadow prices, which
possess certain qualities that make them useful as accounting
prices.

During the following two decades
Kantorovich developed his analysis further, and in a book
published in 1959 he applied it also to macroeconomic problems.
In addition he took a further and very important step by
combining the theorems of linear programming with the theory of
optimal planning in a socialistic economy. He came to the
conclusion that rational planning should be based on results
obtained from optimum calculations of the linear programming type
and, further, that production decisions could be decentralized
without loss of efficiency by getting lower level decision makers
to use shadow prices as the basis of their profitability
calculations.

By his research Kantorovich has strongly
influenced the economic debate in the Soviet Union. He has
emerged as the most prominent member of the "mathematical school"
of Soviet economists and thus of the group of scholars who
recommend a reform of the central planning technique. An
important part of their argumentation is the thesis that the
possibilities of a successful decentralization of production
decisions in a centrally planned economy is depending upon the
existence of a rationally constructed system of prices, including
a unique rate of interest.

During the 1940's linear programming was,
independently of the Russian scholars, also developed by some
American economists, among them Tjalling Koopmans. He was working
as a statistician at the British Merchant Shipping Mission in
wartime, Washington when he encountered a problem of optimal
routing of empty ships. He formulated this problem in accordance
with the linear programming model. In his treatment of this
problem he stressed the importance of shadow prices and in
addition he constructed a method of numerical solution of the
model.

At an early stage Koopmans perceived that
linear programming could be linked up with traditional
macroeconomic theory. He saw that resource allocation in a
competitive economy could be regarded as the solution of a vast
linear programming problem and that the production model could
serve as a basis for a stringent formulation of general
equilibrium theory. In 1951 he expounded this view in a famous
work in which he presented a theory called activity analysis. By
showing, there, that technical efficiency was fundamentally
related to the price system and to the allocation of resources in
a competitive economy, he formed a bridge between the normative
theory of resource allocation and the descriptive general
equilibrium theory. Further, in conformity with Kantorovich he
drew the conclusion that the use of shadow prices created
possibilities of decentralization of production decisions.

In a series of papers published during the
1960's Koopmans treated the problem of how to divide national
income between consumption and investment in an optimal fashion.
This question which is important to all long term economic
planning, concerns a choice between present and future consumtion
and involves consequently judgements of the welfare distribution
between different generations. Koopmans stands out as the great
pioneer in this field of research. He has taught us how to put
the problems and he has formulated a number of important theorems
concerning optimum conditions.

Drs Kantorovich and Koopmans,

On behalf of the Royal Academy of Sciences I ask you to receive
your prizes from the hands of His Majesty the King.